What is Chapter 13 Bankruptcy?

Bankruptcy is a procedure that allows you to propose a payment plan to repay certain debts over a period of three or five years.

In a Chapter 13 plan, you pay a bankruptcy trustee who is appointed by the court.

Your monthly payments to the trustee will consolidate your debts for credit cards, medical and dental bills, mortgage arrearages, car payments, past due income taxes and other debts.

One of the biggest benefits of Chapter 13 bankruptcy is the ability to stop home foreclosure and car repossession immediately and to spread out the repayment of your arrearages (past due balances) under the bankruptcy payment plan.

Additionally, the California court is now facilitating home loan modification through the Chapter 13 bankruptcy process.

In this type of plan, you do not pay any money to the trustee for the mortgage arrearage (past due amount) which makes your plan payments lower.

Additionally, in some circumstances, car loans and real estate debts can be reduced. (The percentage depends on your disposable income [money left over after paying your average monthly living expenses] and the value of the property you own.)

Another option is available that allows for seeking a loan modification during a Chapter 13 bankruptcy.

Reducing House and Car Payments

Because of the volatility of the housing market, many homes are worth less than the outstanding balance on the first mortgage.

If you owe more on your first mortgage than your house is worth, you can probably eliminate (lien strip) your junior (second and third) mortgages, so that you no longer have to pay them.

This usually results in substantial savings.

Because cars depreciate in value quickly, most are worth substantially less than what people owe for them.

If you bought your car at least 2 1/2 years ago or have refinanced it, you can probably lower the amount you owe on the car to what the car is now worth, which will lower your monthly car payments.

Again, this often results in substantial savings.

Investment Property and Vacation Homes

If you have other real property that is not your principal residence and that property is worth less than what you owe on the first mortgage,

you may be able to lower the amount of the first mortgage to what the property is worth, just like you can for a car.

This is in addition to stripping junior mortgages as described in the section above.

Unlike a car, there is no 2 1/2 year waiting period, so it does not matter when you bought the real estate.

Doing this can save you hundreds of thousands of dollars!

You must be able to pay the new, lower amount of debt in full within your bankruptcy payment plan, and that plan can not be longer than five years.

Qualifying for Chapter 13 Bankruptcy

In order to qualify for Chapter 13 Bankruptcy, you need enough regular income to make your home and car payments, as well as whatever amount you owe to the bankruptcy trustee under the debt repayment plan.

There is a limit to how much debt you can have and still be able to file a Chapter 13.

Chapter 11 and Chapter 7 Bankruptcy

If your debts are too high to file a Chapter 13, the only way to save your house from foreclosure or your car from repossession through bankruptcy is to file a Chapter 11, which is normally used by businesses but can also be used by individuals. However, Chapter 11 bankruptcies are very expensive and complicated, and are not generally good solutions for individuals.

Also, if you have had debts discharged in a Chapter 7 within the past four years or a Chapter 13 within the past two years, you will not get any of your debts discharged in a new Chapter 13. However, you may still save your house from foreclosure and/or your car from repossession if you can make the payments.

Many people are successful at keeping up with their Chapter 13 bankruptcy payment plans, especially people whose original financial problems were caused by temporary situations, such as illness and/or temporary unemployment.

However, if you are partway through a Chapter 13 Bankruptcy and find yourself unable to make your trustee payments, you do have options.

Under some circumstances, it is possible to negotiate an extension of the payment plan with the trustee.

In Chapter 7, you might not be able to keep your home or car if you were behind on the payments, but you will not be liable for the amount you owe above what they are worth, and your other dischargeable debts, such as credit cards and doctor/medical bills, will be eliminated.

If you are unsure whether you would be successful with a Chapter 13 payment plan, contact us to discuss your options.

Contact us online or by phone at 510-451-0290 to schedule an appointment. We offer free, no obligation consultations.

We serve Oakland, Berkeley, San Francisco and the surrounding areas.

Designated by Congress as a debt relief agency, we help people file for bankruptcy relief under the Bankruptcy Code.

The information you obtain at this site is not, nor is it intended to be legal advice. You should consult an attorney for advice regarding your individual situation. Contacting us does not create an attorney-client relationship.